Thursday, February 23, 2017

At the Reuters Live Newsmaker Event, a panel on The Future of Shareholder Activism featured Jeff Ubben of ValueAct Capital andPaul Hilal of Mantle Ridge and they were later joined also by Zach Oleksiuk of BlackRock and Richard Brand of law firm Cadwalader.

Jeff Ubben (ValueAct Capital)

He said "The last fat pitch was financials in summer of 2016. We're very late cycle." He's seen some activity that's concerning to him where companies are just doing silly deals or allocating tons of money to stupid things. He says the markets are loving it, but he's not. He says he's had to be "Mr. No" in board rooms which is the kind of thing he has to do at tops, whereas at bottoms he needs to tell people to buy. Ubben's got $3 billion in cash right now (manages $16 billion) and is clearly cautious.

Thinks Morgan Stanley's (MS) earnings will go from $2.50 to $4.50. They've sold some shares but still own it. Sounds like he only sold because shares have gone up so far so fast.

"One of the hardest things to do is refresh a board." "The hedge fund activist is putting us on a very awful path. These are guys with 1 year money and want 1 year returns. The hedge fund activist is a big problem."

Thinks activist investing should be its own asset class. You've got private equity with 10 year lockups, hedge funds mainly with 1 year lockups, so perhaps activist investors could slide in at 4-5 years.

Ubben also noted that he thinks large cap activist plays are 'treacherous' with high PEs and then not a lot of growth. Argues that so much money flowing into alternatives has inflated things. "Everything about Trump I think is inflationary."

"It's uncomfortable for directors to talk to shareholders" due to regulations (Reg FD). "Boards are just ... ugh." Thinks this is a 'young' business (i.e. younger people have the energy to do the legwork) and doesn't think he'll be the portfolio manager of ValueAct in five years. For more on this fund, we've highlighted recent ValueAct portfolio activity here.

Paul Hilal (Mantle Ridge)

Prior to founding Mantle Ridge, Hilal worked at Bill Ackman's Pershing Square. Has a 5-year lockup at his fund with over $1 billion with a vehicle designed to hold 1 company. Purposefully moved away from an annual payment structure and he gets paid at the end of the lockup if he's done his job and created value.

Argues longer lock-up helps when dealing with management as he's not just in for a quick hit. He's been working with railroad CSX (CSX). Hilal notes that "(Trump) likes the thought of a manufacturing renaissance here." If a railroad can be a facilitator then that will be welcome by the administration. Thinks it's very useful for companies to hear from various types of shareholders: hedge funds, institutional investors, etc.

Talked about the rules around disclosing activist positions (i.e. 13D filings etc). Thinks there's a decent balance now. Seemed to think potentially moving disclosure requirements down to a 1% threshold would be difficult as shares can move against you.

Thinks it's useful for Directors of companies to go on a 'listening tour' to hear what people think about the company first. It's in the company's interest to attract smart investors to give input.

Zach Oleksiuk (BlackRock)

"We are skeptical of directors who are focused on a single issue or a single thesis." Notes there's a lot of different types of activists in terms of style and quality. Thinks there will be more investor focus on environmental and social issues going forward, especially if the issues impact the business.

Richard Brand (Cadwalader)

Settlement outcomes should be driven by two things: what's right for the company (shareholder value) and the relative leverage of the parties. The opinions of large institutional shareholders matters a lot. Thinks there will be a convergence of private equity style and activist style investing in the future. Also argued hedge funds could start to buy companies (cites Elliott Management, Carl Icahn). And then private equity investors could start behaving more like activists.

Barry Rosenstein's activist hedge fund JANA Partners has filed a 13D with the SEC regarding Tiffany & Co (TIF). Per the filing, JANA now owns 4.9% of Tifany with over 6 million shares (inclusive of options to purchase 1.39 million shares).

This is a newly disclosed position for JANA. The filing notes they were buying throughout January and into early February, with the bulk of their buying coming at between $77.19 and $83.15. They're working together as a group with Francesco Trapani (who owns $16 million worth of stock as well) who they've nominated to the board.

The filing specifically notes they've had discussion with Tiffany about: "the balance sheet, potential opportunities to accelerate top line growth and expand margins, supply chain, working capital, and the composition of the board."

Per Google Finance, Tiffany & Co is "a jeweler and specialty retailer. Through its subsidiaries, the Company designs and manufactures products and operates TIFFANY & CO. retail stores. The Company's segments include Americas, Asia-Pacific, Japan, Europe and Other. The Americas segment includes sale in Company-operated TIFFANY & CO. stores in the United States, Canada and Latin America. The Asia-Pacific segment includes over 80 Company-operated TIFFANY & CO. stores in China, Korea, Hong Kong, Taiwan, Australia, Singapore, Macau, Malaysia and Thailand. The Japan segment includes approximately 60 Company-operated TIFFANY & CO. stores. The retail sales in Europe are transacted in over 40 Company-operated TIFFANY & CO. stores. The Other segment includes retail sales and wholesale distribution; wholesale sales of diamonds, and licensing agreements."

Andreas Halvorsen's hedge fund firm Viking Global has filed a 13G with the SEC regarding shares of Calithera Bioscience (CALA). Per the filing, Viking now owns 7.8% of the company with over 1.6 million shares.

This is a newly disclosed equity position for Viking and the filing was made due to activity on February 8th.

Per Google Finance, Calithera Bioscience is "a clinical-stage pharmaceutical company. The Company focuses on discovering and developing small molecule drugs directed against tumor and immune cell targets that control key metabolic pathways in the tumor microenvironment. It is engaged in developing agents that take advantage of the metabolic requirements of tumor cells and cancer-fighting immune cells, such as cytotoxic T-cells. Its lead product candidate, CB-839, is a critical enzyme in tumor cells. Its other product candidate, CB-1158, which is an enzyme that depletes the amino acid arginine, a key metabolic nutrient for T-cells. Its lead preclinical program in tumor immunology is directed at developing inhibitors of the enzyme arginase and may provide a therapeutic agent for the target. CB-839 is a selective, reversible and orally bioavailable inhibitor of human glutaminase. Hexokinase is an enzyme in the pathway that allows cancer cells to convert glucose to energy to fuel cancer cell growth."

Someone has also posted videos of Munger's Q&A session after the meeting. There's 22 short videos in total with a playlist at the bottom.

Here's a few takeaways:

- He always reads 3 or 4 newspapers every morning: WSJ, New York Times, Financial Times, LA Times

- Thinks a single-payer healthcare system would work a lot better

- They're doing a lot of stuff (investment wise) these days that they wouldn't have done in the 'old days.' Specifically mentioned Apple (AAPL): "It's a very odd thing for us to do. And obviously we've got no special insights as to how sticky Apple's business is."

- "I think young people should learn more and shout less."

- "The trouble with real estate is everybody else understands it. And the people you're competing with specialize in little blocks and they know more about the industry than you do."

- "I think a lot of easy money that comes into finance just ruins practically everything."

- BYD is another stock they never would have done back in his younger day. Partly he's betting on the horseman there as he's fanatical about his business.

- Amazon's Jeff "Bezos is utterly brilliant and utterly remorselessly ambitious. I would never bet against Jeff Bezos."

- Interested in the 'agricultural revolution' like gene splicing etc and says the world needs it as we have to get more out of our existing land.

- "If you haven't prepared (for the opportunity) then you won't seize it."

- "If you run a business where people have to trust your food, you just can't afford to have a scandal." re: Chipotle (CMG).

- Do you think Walmart (WMT) can turn into Sears (SHLD)? "Well, not for a long time."

- On the airlines: it's more concentrated (fewer players) and there's no real substitute for air travel. "I don't regard it as a perfect model." Considering how the world's changed, they thought it was a decent opportunity... but it's "not a cinch." "It's a sector bet, not a bet on individual airlines."

- Munger says he read Barrons for 50 years and found 1 investment opportunity... made $80 million on it. Then gave that money to Li Lu, who turned it into $400-500 million. Munger's also read Fortune for 60 years but never bought a stock due to it.

- "I don't like to gamble against up odds. If the odds are against me I just don't play."

- Nowadays it's tough in merger arbitrage as it's too crowded

- On John Malone: he's something of a genius and doesn't like to pay taxes and has been very successful and Munger's just ignored it. "I've always been troubled by the cable industry." Munger doesn't like the movie business either.

- Doesn't talk to Ted Weschler and Todd Combs a ton, but some. "They're both good in their own way and they both love Berkshire and they've both made contributions." Sounds as though the younger portfolio managers helped Charlie and Warren Buffett think differently about things like the airlines and Apple.

- "I don't want to be in the bottom 80% of the auto dealerships."

- On 'cloning' in investing: "I do it all the time." He added, "Of course it's useful." He talked about the trouble with it is if you pick investors later in their game (i.e. Berkshire Hathaway) you basically inherit their problems of being constrained by size because they have to invest a certain way. So Munger encouraged younger people to look at slightly younger investors, though admitted it's harder to pick out the right people to follow.

- On mistakes: "We learned a lot vicariously, but also learned a lot from unpleasant experiences. You'll learn."

Embedded below is the video playlist of Munger's Q&A session after the Daily Journal meeting. Just let the videos keep playing to see the next one out of the 22 total short clips:

Per Google Finance, Domino's Pizza is "operates pizza stores at 12,500 locations in over 80 markets. It operates through three segments: domestic stores, international franchise and supply chain. Its Domestic Stores segment consists primarily of its franchise operations, through which it operates network of over 4,820 franchised stores located in the United States. Its International Franchise segment consists of a network of franchised stores in approximately 80 international markets. Its supply chain segment operates approximately 20 regional dough manufacturing and food supply chain centers in the United States; a thin crust manufacturing center; a vegetable processing center, and a center providing equipment and supplies to certain of its domestic and international stores. Its basic menu features pizza products in various sizes and crust types. Its stores also offer oven-baked sandwiches, pasta, bread side items, desserts and soft drink products."

Activist investor Carl Icahn has taken a stake in Bristol-Myers Squibb (BMY) according to The Wall Street Journal. He apparently sees it as a possible takeover candidate as well.

He's not the only activist involved now, either. Barry Rosenstein's JANA Partners had been in talks with the company after becoming a shareholder in the fourth quarter of 2016. As a result, the company added three new board members and also added to its share repurchase program.

Now, apparently Icahn has gotten involved as well. If his past playbook is any indication, perhaps he pushes the company for a sale?

Per Google Finance, Bristol-Myers Squibb is "engaged in the discovery, development, licensing, manufacturing, marketing, distribution and sale of biopharmaceutical products. The Company's pharmaceutical products include chemically synthesized drugs, or small molecules, and products produced from biological processes called biologics. Small molecule drugs are administered orally in the form of a pill or tablet. Biologics are administered to patients through injections or by infusion. It offers products for a range of therapeutic classes, which include virology, including human immunodeficiency virus (HIV) infection; oncology; immunoscience; cardiovascular, and neuroscience. Its late-stage investigational compounds that are in Phase III clinical trials include Beclabuvir, BMS-663068 and Prostvac."

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